Monday, March 22, 2010

The Great Investors: Little Old Lady Edition

Why does a person decide to become an actuary?They realize they don't have the charisma to make it as an accountant.-riff on an old joke

I was thinking about Ida May Fuller and actuaries this morning.

She was the first person to receive Social Security benefits. Here's the SSA's thumbnail history (research note #3):

On January 31, 1940, the first monthly retirement check was issued to Ida May Fuller of Ludlow, Vermont, in the amount of $22.54. Miss Fuller, a Legal Secretary, retired in November 1939. She started collecting benefits in January 1940 at age 65 and lived to be 100 years old, dying in 1975.

Ida May Fuller worked for three years under the Social Security program. The accumulated taxes on her salary during those three years was a total of $24.75. Her initial monthly check was $22.54. During her lifetime she collected a total of $22,888.92 in Social Security benefits.

Here's the SSA discussion of life expectancy:Life Expectancy for Social Security

If we look at life expectancy statistics from the 1930s we might come to the conclusion that the Social Security program was designed in such a way that people would work for many years paying in taxes, but would not live long enough to collect benefits. Life expectancy at birth in 1930 was indeed only 58 for men and 62 for women, and the retirement age was 65. But life expectancy at birth in the early decades of the 20th century was low due mainly to high infant mortality, and someone who died as a child would never have worked and paid into Social Security. A more appropriate measure is probably life expectancy after attainment of adulthood.

As Table 1 shows, the majority of Americans who made it to adulthood could expect to live to 65, and those who did live to 65 could look forward to collecting benefits for many years into the future. So we can observe that for men, for example, almost 54% of the them could expect to live to age 65 if they survived to age 21, and men who attained age 65 could expect to collect Social Security benefits for almost 13 years (and the numbers are even higher for women).

Also, it should be noted that there were already 7.8 million Americans age 65 or older in 1935 (cf. Table 2), so there was a large and growing population of people who could receive Social Security. Indeed, the actuarial estimates used by the Committee on Economic Security (CES) in designing the Social Security program projected that there would be 8.3 million Americans age 65 or older by 1940 (when monthly benefits started). So Social Security was not designed in such a way that few people would collect the benefits.

As Table 1 indicates, the average life expectancy at age 65 (i.e., the number of years a person could be expected to receive unreduced Social Security retirement benefits) has increased a modest 5 years (on average) since 1940. So, for example, men attaining 65 in 1990 can expect to live for 15.3 years compared to 12.7 years for men attaining 65 back in 1940.

(Increases in life expectancy are a factor in the long-range financing of Social Security; but other factors, such as the sheer size of the "baby boom" generation, and the relative proportion of workers to beneficiaries, are larger determinants of Social Security's future financial condition.)

Table 1: Life Expectancy for Social Security

Year Cohort Turned 65

Percentage of Population Surviving from Age 21 to Age 65

Average Remaining Life Expectancy for Those Surviving to Age 65

Male

Female

Male

Female

1940 1950 1960 1970 1980 1990

53.9 56.2 60.1 63.7 67.8 72.3

60.6 65.5 71.3 76.9 80.9 83.6

12.7 13.1 13.2 13.8 14.6 15.3

14.7 16.2 17.4 18.6 19.1 19.6

Table 2: Americans Age 65or Older 1880-1990

Year

Number of Americans Age 65 or Older

1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

1.7 million 2.4 million 3.0 million 3.9 million 4.9 million 6.7 million 9.0 million 12.7 million 17.2 million 20.9 million 26.1 million 31.9 million 34.9 million

$924.80 for every dollar invested.

That's in the ballpark with the 434,057% gain in Berkshire Hathaway's book value 1964-2009 although it lags by almost an order of magnitude the $10,000 to $80,000,000 (roughly) return on BKHT/BRK stock in the same period.